WA may have the last laugh on gas supplies

Most state governments, the federal government and certainly the gas companies don’t want to hear that Gavin Goh’s argument is gaining any traction, but the head of Western Australia’s gas buyers group, DomGas Alliance, thinks political reality is heading in his direction.

That’s because Western Australia, unlike other states, has a long-term domestic gas reservation policy, currently set at 15 per cent for new gas projects. This doesn’t mandate lower prices in Australia, as manufacturers in Victoria and NSW are demanding, but it does ensure security of supply and has an indirect impact on domestic prices.

Compare that with the eastern states, which are only now gearing up for a massive liquefied natural gas export boom out of Gladstone in Queensland. Any idea that Australian consumers are going to be paying much higher prices for scarce supplies of domestic gas as a result is going to make voters very unhappy.

Not that this means prices are flat in Western Australia.

In its first term,
Colin Barnett
’s government forced consumers to pay the price of the previous Labor government’s costly and unsustainable decision to freeze power prices over many years. Prices rocketed more than 60 per cent in a state where most power comes from gas rather than coal.

And despite a Premier in full election mode promising that prices will only go up at the rate of inflation over the next few years, this assessment is regarded as extremely optimistic by most – including Barnett’s own state budget predictions last year.

But it does mean that domestic gas supply, at least, will be plentiful in Western Australia – partly through the reservation policy, partly through new domestic production.

In contrast, Goh says that companies involved in the LNG Gladstone projects have over-committed in order to ensure long-term export contracts. He believes that gas will be in short supply everywhere else in Australia, due to an interconnected national market.

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Some companies, Goh argues, won’t be able to get gas at any price because producers will be too willing to pay a premium to fulfil export contracts. Even if this doesn’t occur, sharply higher prices are all but automatic.

Jumps in power prices are not due to gas alone, of course.

Add in the favourite political villains of network “gold plating’’ to avoid any possibility of blackouts, carbon pricing and various expensive green energy schemes.

But the impact of gas is significant and has already started to take effect.

New domestic contracts for wholesale gas are moving closer to $9 a gigajoule, according to
Santos
chief executive
David Knox
. That compares with expiring contracts at prices between $3.50 and $4.50 a gigajoule.

The federal government argues that this will only increase the incentive to develop otherwise marginal domestic supplies and that restrictions on pricing and domestic reservation policies have a perverse effect in limiting exploration and development.

It cites the shale gas industry in the United States as an example of higher prices causing a huge increase in supply – and a subsequent fall in prices.

Well-known energy consultant Keith Orchison agrees, saying that manufacturers and some politicians are living in a fool’s paradise if they believe they can engineer a lower-priced gas future, and maintains that supply won’t be an issue.

“DomGas is playing on nervous politicians and the fears of the community,’’ Orchison says.

“It doesn’t make sense that we can have wholesale prices close to $9 a gigajoule and have a shortage of gas. Retailers will pay the market rate and pass it on. And producers will be doing all they can to develop new supplies. ’’

Western Australia, Orchison says, has only been able to get away with its reservation policy because it has such large amounts of gas. The idea took shape decades ago under then WA premier Charles Court as part of negotiations on the development of the North-West Shelf, including government guarantees under a take-or-pay contract.

This proved extremely expensive for taxpayers at the time, but successive state governments have continued and strengthened the reservation policy.

However, US politicians are making sure that their shale gas frenzy and cheap prices remain largely for domestic use.

In Australia, not only is the export market rapidly accelerating but there will be, at best, a delay between increased demand and supply increasing to meet it.

In a state like NSW, which produces only 5 per cent of its own gas needs and has just put in new restrictions on coal seam gas development, the crunch is likely to come sooner.

At the moment, the state relies on importing gas from South Australia, Queensland and Victoria. Unless NSW is willing to pay the higher prices to match those that producers obtain from exporting it, the domestic market won’t appear too attractive.

Add in the vociferous complaints from farmers – as well as from the state’s suburban residents – about coal seam gas development near their properties.

It means that the political blame game will only get louder this year.